Only Fools Rush In

With the warm days of summer upon us, news of yet one more takeover bid might seem like déjà vu. In late May, US medical-device group Stryker confirmed that it was evaluating a bid for UK-based Smith & Nephew. Before that, GlaxoSmithKline announced a major three-part deal to acquire Novartis' vaccines business. In June, Minneapolis-based medical device maker Medtronic announced a $43 billion bid to acquire Dublin-based rival Covidien. The reality starting to set in is that 2014 stands to be a record year for mergers and acquisitions with a blistering $3.51 trillion in deals estimated to be set by year's end.

What to make, then, of this frenzy of M&A activity, especially with so much of it happening in the life sciences and medical device industries? Mergers not only help boost a company's book value but are also highly attractive to many US companies in search of lower corporate tax rates abroad. Experts have remarked that with many companies facing expiring patents and decreased revenues, the growing M&A trend in the pharmaceutical industry is unlikely to abate anytime soon.

It pays to be cautious

But companies in search of an "easy buck" through an acquisition may end up getting more than they bargained for. That's because successor liability laws transfer a whole host of liabilities from the target company to the purchaser in an acquisition, including criminal and civil liability stemming from past wrongdoing.

For example, a full decade after buying orthopedic device maker DePuy Inc. in 1998, Johnson & Johnson ended up paying $77 million in fines and penalties to the Department of Justice and Securities & Exchange Commission due to the subsidiary's widespread bribery activity in Greece at the time of the acquisition. Expect the latest round of mergers to similarly arouse scrutiny from U.S. government regulators, and those companies that have ignored compliance issues in their pre-acquisition due diligence to suffer buyer's remorse later on.

Think compliance early on

Long before a deal is signed in ink, a company's compliance and legal team should be involved in the vetting process. One reason why compliance should have a seat at the M&A table early on is so that they stay informed of upcoming deals in the pipeline in order to marshal the necessary resources prior to the announcement of a takeover bid. Once it is determined that the company is serious about acquiring a target company, the first step should be to assess the target's initial risk profile.

Asking certain key questions at the outset will help determine the target's risk level and the scope of any future due diligence. For example:

» What, if any, compliance program already exists at the company? Having zero pre-existing compliance is certainly not fatal to the deal, but is a good thing for the acquiring company to know in assessing risk.

» Does the acquisition contemplate a full share purchase or just an asset purchase of the target company? The latter will carry less successor liability for past wrongdoing.

» What laws is the target company currently subject to? The acquisition of a company does not create jurisdiction where none existed before.

» What is the ultimate appeal of the target company? Acquiring an expanded market share carries different risk from solely purchasing new technologies or patents.